Allergan (AGN) Shares Pummeled on New Inversion Rules

Shares of Allergan plc (AGN) were trading down -53.55 or -19.29 percent to $224.00 per share in Tuesday’s premarket after the Treasury Department announced new steps to curb “inversion” transactions, deals where U.S. companies reincorporate abroad after the purchase of a foreign company. Allergan stock closed at $277.55, up +9.46 or +3.53 percent in Monday’s regular trading session.

Stock Analysis

Formerly known as Actavis Plc, Dublin, Ireland based Allergan plc has their administrative headquarters in Parsippany-Troy Hills, New Jersey.

The company is a transnational pharmaceutical company specializing in the development, manufacture and commercialization of generic and over the counter medications. The company operates in 100 countries with 40 manufacturing facilities and 27 global marketing and sales and research and development centers. Allergan employs over 30,000 people and changed its name from Actavis after acquiring Allergan in March of 2015 for $70.5 billion.

Last November, Pfizer (PFE) agreed to purchase Allergan for $160 billion, which would create the largest pharmaceutical company in the world. The acquisition would have Pfizer move its headquarters to Ireland and would be the largest ever relocation of a U.S. company abroad in what is known as an “inversion” deal.

To avoid possible restrictions on the transaction, the deal was structured to appear that the smaller Ireland based Allergan was buying Pfizer, despite the combined company being called Pfizer Plc and being led by Pfizer’s Chief Executive Officer Ian Read. The U.S. Treasury, facing the prospect of losing billions in tax revenues immediately called for legislation that would limit inversions. The potential acquisition was criticized by President Obama, Hillary Clinton and Presidential candidates Bernie Sanders and Donald Trump.

The U.S. Treasury Department announced new steps it would take to deter tax avoiding transactions such as inversions, stating that it would impose a three year limit on foreign companies accumulating U.S. assets to avoid ownership limits that would subsequently lead to an inversion deal. In addition, the new Treasury rules will target a practice known as earnings stripping, a strategy where the U.S. unit of the redomiciled foreign company is saddled with additional debt and U.S. profits are shifted through interest payments to the new lower tax foreign jurisdiction.

Treasury Secretary Jacob Lew said that, “Some companies are serial inverters. They acquire multiple U.S. firms in stock-based transactions over a short period of time. This increases their size and reduces the negative tax consequences of a subsequent inversion. Today’s action takes away a significant amount of the tax benefits of these serial inversions.” Lew added that the Treasury was “focusing on transactions that generate large interest deductions (on tax bills) by simply transferring debt between subsidiaries without financing new investment in the United States.”

While the new rules could threaten the proposed merger of Pfizer with Allergan, Pfizer plans to follow through with the deal, redomiciling in Ireland where Allergan is based and completing the transaction by the end of the year. In a joint statement released late Monday, Pfizer and Allergan said that, “We are conducting a review of the US Department of Treasury’s actions announced today. Prior to completing the review, we won’t speculate on any potential impact.”

Jay Hawk enjoyed a 12-year professional financial markets career incorporating extensive first hand futures and options experience obtained by trading in the stock, commodity and forex markets on U.S. exchanges. Since retiring as a full-time financial market professional, he has been actively trading stock, commodities, forex and options for his own account and managing funds for others, as well as writing financial market commentary and educational articles.